Saudi Arabia took a big leap forward in transforming its pension system with the recent announcement of comprehensive reforms, designed with support from the World Bank, aimed at enhancing income protection during old-age, but also promoting gender equality. Aging populations, caused by increasing life expectancy and falling fertility rates, combined with the changing nature of work and the erosion of informal and traditional family support systems, have created considerable challenges for pension systems worldwide. Many are facing fiscal sustainability pressures and adequacy concerns, including in the Middle East and North Africa (MENA) region. Pension reform is always difficult due to the political economy challenges, which is why this comprehensive pension reform in Saudi Arabia is such a breakthrough. It truly sets a new benchmark for the MENA region, addressing critical issues such as retirement age, maternity leave, and social insurance coverage.

Increasing and Equalizing Retirement Age

One of the cornerstone changes in Saudi Arabia’s new pension reform is the gradual increase in the statutory retirement age from 58 to 65 years. This adjustment aims to ensure the sustainability of the pension system and reflect the longer life expectancy in the country, which increased from 52 years old in 1969 (when the Social Insurance Law was issued under a Royal Decree) to 78 in 2022. In and of itself, this increase in life expectancy is an achievement and an example of the success of human development policies. The reform also equalizes the retirement age between men and women, promoting gender equality in the labor market and enhancing the adequacy of pensions for women retirees. This parity is essential in creating a fair and inclusive system where both sexes can equally contribute to and benefit from social security. The reform also raises the required contribution period for early retirement from 25 to 30 years. This change aims to encourage longer workforce participation, thereby reducing the financial strain on the pension system while still providing an option for early retirement under more sustainable conditions. As we examined in our flagship report Built to Include, as populations are aging, a social protection system and pension program that supports active aging are vital to ensuring that everyone benefits.

Maternity Leave Reform: A Step Forward

The new law also introduced a reform where maternity leave will now be financed through social insurance rather than by individual employers. This change ensures that both men and women contribute to financing maternity leave, easing the financial burden on employers. The reform not only promotes gender equality in the workplace, but also encourages higher female participation in the labor force. This is in line with evidence that maternity leave that is funded from a pool like social insurance rather through the individual employer has a stronger positive impact on female employment, It reduces the financial burden on employers, thereby encouraging them to hire more women. The new law also entitles non-Saudi women to the benefits which makes the Saudi labor market more attractive for global talent.

A Role Model for Pension Reform

Pension reforms are among the most difficult reforms due to their wide impact and political economy challenges. Saudi Arabia took various measures in the rollout of the reform. First, most reform measures only apply to newly employed people in the public and private sectors who have not made prior contributions to the social insurance systems. Current participants stay under the existing rules. The only exception is that for those with less than 20 years of contribution and under 50 hijri (lunar) years old some changes in retirement age and vesting period will apply. Second, contribution rates increase only gradually over five years, from 9 to 11 percent. This phased approach allows both employees and employers to adjust gradually to the new rates, ensuring a smooth transition. Finally, the reforms are being accompanied by a targeted communication campaign, with a dedicated platform and an option for workers to input their national ID to receive personalized details on how they are affected by the reform, including their new early retirement eligibility date and their regular retirement date.

Saudi Arabia’s pension reform is a groundbreaking development for the MENA region, but more reforms are needed. Achieving a truly robust pension system requires further reforms in the entire region beyond parametric reforms such as retirement age and contribution periods. To ensure sustainability and adequacy, it is essential to diversify pension funds, design adjustment mechanisms, and enhance private savings options. These measures can offer greater flexibility and security, addressing the diverse needs of the population. By adopting a holistic approach that balances fiscal sustainability with social equity, countries can better protect against economic, demographic, and political risks. A comprehensive strategy that takes these measures into account would not only secure the financial future of aging populations but also foster an inclusive and resilient pension systems across the globe. Such initiatives set a precedent for forward-thinking policies that other nations can follow to enhance their social security frameworks, and Saudi Arabia, with its most recent reform, sets a great example for the rest of the region.

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